What is the Difference Between Base Rate and MCLR?

The difference between Base Rate and MCLR is that MCLR is impacted by RBI's modifications to the repo rates whereas Base Rate is not affected by those changes. Some of the top financial institutions of the country have recently revised their base rate and the marginal cost of funds-based lending rate (MCLR), benefiting lakhs of customers. However, there are many customers, whose loan interest rates are determined by the former benchmark, i.e. the base rate, given that the implementation of the two rates is separated by a period of about five years.

Difference Between Base Rate and MCLR

 

In July 2011, the base rate was introduced. It represents the minimum interest rate at which a bank can extend credit, with certain exclusions set by the RBI. The following three variables that determine the average cost of funds, operating cost and negative carry to cash reserve ratio determine this.

The minimum interest rate that a bank can charge for lending is known as the marginal cost of funds based lending rate (MCLR) for home loans. It was enacted on 1 April 2016 after it was introduced by the Central Bank of India. Since then, it has served as the internal standard that banks use when lending to any category. The base rate system, which was in force since 2010, was superseded by it.

The table below lists some of the differences between Base Rate and Marginal Cost of Lending Rate (MCLR):

Base Rate

MCLR (Marginal Cost of Lending Rate)

Base Rate is independent of RBI's changes to the repo rates.

MCLR is impacted by RBI's changes to the repo rates.

Operating costs and costs required to maintain the cash reserve ratio also affect the base.

Along with operating cost and cost of maintaining cash reserve ratio, MCLR is also calculated taking into account deposit rates, repo rates and other factors.

The Base Rate is determined by the typical cost of funding.

The incremental/marginal cost of funds is the basis for MCLR.

The profit margin or minimum rate of return is taken into account while determining the base rate.

Tenor premium is considered when calculating MCLR.

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FAQs on Difference Between Base Rate and MCLR

  • MCLR is impacted by RBI's modifications to the repo rates whereas Base Rate is not affected by those changes. This is the difference between Base Rate and MCLR.

  • In contrast to the Base Rate, which is controlled by the average cost of funds, the MCLR is decided by the actual cost of funds. Because rates based on this system are more responsive to changes in policy rates, the RBI introduced the MCLR.

  • To set the lending rates for commercial banks, MCLR has taken the place of the previous Base Rate mechanism. On April 1, 2016, the RBI put into place MCLR to set loan interest rates. It serves as a benchmark rate for banks internally to establish the amount of interest they can charge borrowers.

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